Soaring above the competition.

Anchored by resilient yields, CapitaLand Mall Trust (CMT) has been a safe harbour for investors but is also starting to emerge as a growth play. As the retail sector bottoms out, CMT is set to outperform as full contributions from Westgate and the return of Funan takes DPU back on a multi-year growth path. CMT’s share price should re-rate as earnings growth returns to an upward trajectory of c.3- 4% p.a. (vs S-REIT’s average of c.1-2%).

Our Target Price for CMT is adjusted to S$2.44 as the proportion of equity financing (c.35%) used to acquire Westgate came in above our initial projections (20%). Maintain BUY!

Where We Differ: Deep dive into micro-markets gives us confidence that CMT can surprise on the upside.

While the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply over 2018-2019, we believe the new supply is not a big threat to CMT given strong pre-commitments ahead of completion.

Meanwhile, higher contributions from Westgate and Funan will help drive up DPUs in a sustained manner. Our deep dive into Westgate also gives us confidence that the worst is over for the mall – rents appear to be bottoming out, offering upside to reversions as they fall due.

Potential catalyst: Better-than-expected reversions or acquisitions.

Expectations for CMT are low, as investors are barely anticipating any rental reversion growth, in our view. The recent uptick in retail sales, if sustained, limits downside to rental reversions, and may trigger a share price re-rating.

The utilisation of its balance sheet to fund further acquisitions also offers an upside surprise to our estimates.

Valuation:

Reiterate BUY; Target Price adjusted to S$2.44 to reflect the higher proportion of equity used to finance the Westgate acquisition.

At current price, the stock offers FY19F DPU yield of 5.2% and total potential return in excess of 14%.

Key Risks to Our View:

More aggressive rate hikes than consensus expectations may cause ripples in the market. Being a proxy for interest-rate investment, CMT may then suffer from selling pressure.

WHAT’S NEW - Ushering in a new era of growth, starting with Westgate

Recap: Our thoughts on the Westgate acquisition; A new leader emerging in the West.

On 27 August 2018, CMT proposed the acquisition of the remaining 70% stake in Westgate - an iconic retail development which enjoys direct connectivity to both Jurong East MRT Station and bus interchange - from the Sponsor for S$789.6m (or S$805.5m including acquisition-related expenses).

With the merits of the proposed acquisition extending beyond immediate DPU accretion, we believe the timing (just as rents are showing signs of bottoming) is right and the price is fair. If the deal goes ahead, it would solidify CMT’s leadership position within the Jurong Regional Centre subzone with a 56% share vs 41% previously.

The post-transaction cost yield of 4.3% also reflects CMT’s strength in capital recycling, as it redeploys capital from the sale of Sembawang Shopping Centre which we estimate was divested at an exit yield of less than 3%.

Tighter yield at the outset but strong growth potential awaits.

In April 2017, Jurong Point was sold to Mercatus Co-operative for S$2.2bn. On an NLA basis, the consideration for Westgate works out to S$2,746 psf, which represents an c.18% discount to the S$3,343 psf for Jurong Point.

While its NPI yield of 4.3% appears tight at first glance, we believe that it is reflective of current market transactions and offers upside if strategies to increase rents and extract further synergies are executed successfully. Additionally, we note that Westgate is a relatively young mall offering greater long-term growth potential supported by company-specific drivers and positive demographic trends.

Thesis unchanged; DPUs to reach new heights in FY19F-20F.

In our earlier report (see CapitaLand Mall Trust - Soaring above the competition | SGinvestors.io), we assumed an 80%/20 debt/equity funding mix for Westgate. While CMT has elected for a higher proportion of equity funding (c.35%), the acquisition remains accretive. Based on a 65%/35% debt/equity mix, we estimate FY19F DPU accretion to be between 0.8-1.2%.

While immediate accretion from the Westgate acquisition is lower compared to our initial estimates, it leaves room for further acquisitive opportunities ahead.

But does not detract from our key thesis of a resurgence of growth for CMT.

Notwithstanding the slightly higher unit base, we believe that CMT could lead outperformance among retail REITs in 2019, as twin engines Westgate and Funan (which has been undergoing redevelopment since 2016) are set to drive DPU growth in FY18F-20F at c.4% p.a. vs SREIT’s average of c.1-2%.

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